The payer’s choice, American Investor, Winter 2018

According to figures from the Ministry of Finance, the receipts of the Polish state budget in 2016 were over PLN 323.6 billion, the greatest source being VAT of about PLN 126.6 billion. Despite the high amount of VAT paid into the state budget, specialists estimate that the figure could have been tens of billions of zloty higher if not for tax fraud, where VAT owed to the public coffers was pocketed by dishonest taxpayers. One of the many mechanisms recently introduced into the Polish regulations with the aim of combating tax fraud and increasing VAT proceeds is the “split payment” system. In the EU, this mechanism is currently used in Czechia and Italy, and it is also used in Turkey.

How will it function

Under the Act of November 9, 2017, Amending the VAT Act and Certain Other Acts, in the Polish legal system the split payment mechanism will involve payment of the gross amount due under each invoice in two parts: (i) the VAT due under the invoice, to be paid to a VAT account, and (ii) the net amount, to be paid to the seller’s ordinary current account. But this does not mean that the purchaser of the goods and services will have to make two separate transfers for payment of a single invoice. The division will be made automatically upon submission of a note to the bank in which the buyer indicates (i) that the buyer wishes to use the split payment mechanism for the transfer, (ii) the amount of VAT due, which is to be transferred to the seller’s VAT account, and (iii) the number of the invoice being paid. The buyer will be responsible for properly indicating the amount of VAT to be assigned to the VAT account, as the entity executing the payment (e.g. the bank) will not verify the data provided.

Under the amending act, a VAT account is an account created automatically by the bank or savings and loan association for each VAT payer with a current account at the bank or S&L. As a rule, a VAT account will be created for each of the taxpayer’s current accounts. As an exception, if the taxpayer has several current accounts at the same bank or S&L, only one VAT account will be created for the taxpayer at that institution. Under the amending act, no additional fees will be charged for maintaining the VAT account. Moreover, the funds in the account may bear interest, and the accrued interest will be assigned to the taxpayer’s current account. The VAT account may be operated only in Polish zloty. The obligation to automatically create VAT accounts will apply only to Polish banks and S&Ls. Thus if the seller maintains a foreign bank account, it will not be subject to the split payment regime.

Freedom of choice—really?

In theory, the split payment mechanism will be voluntary. Nonetheless, the act provides for a right to choose this scheme only for the buyer of goods or services. The seller will have no influence over the buyer’s use of the split payment mechanism. From the point of view of sellers, this solution is disadvantageous, as they risk having a portion of their funds frozen in the VAT account, where previously they could freely use those funds for current purposes. Moreover, even if a contractual agreement shall obligate the buyer not to use the split payment mechanism, that shall not prevent the buyer from using the scheme, because the act vests that right in the buyer.

Restrictions

The taxpayer will not be able to freely dispose of funds in its VAT account. The act provides an exhaustive list of the instances when the VAT account can be charged, generally involving VAT settlements. Firstly, the taxpayer will be allowed to use funds in the VAT account (i) to pay output VAT to the tax office’s account, (ii) to pay input VAT from its own purchase invoices to the supplier’s VAT account, and (iii) to issue a VAT refund to the buyer’s VAT account when a correcting invoice is issued. As an exception, the act provides for the possibility of paying out funds from the VAT account to the taxpayer’s current account, but such payment is possible only at the taxpayer’s request, after obtaining the approval of the head of the tax office, issued in the form of an order within 60 days after submission of the application. A decision on payout of funds from a VAT account is a discretionary decision. This means that the head of the tax office may issue a refusal in any instance as he or she sees fit. The act also indicates instances where the head of the tax office is required to deny the request, e.g. when the taxpayer is in arrears in payment of VAT.

In our view, these limitations will in practice spur a greater number of taxpayers to use the split payment mechanism. Given the choice of waiting for the uncertain approval of the head of the tax office to freely dispose of funds in their VAT account, taxpayers will prefer to use these funds to pay their own VAT obligations, whether in the form of input VAT owed to their suppliers or output VAT owed to the tax office—and this will be possible only if they opt to use the split payment mechanism.

System of incentives

The amending act also provides for numerous incentives for businesses, intended to encourage taxpayers to use the split payment mechanism.

The most significant incentive is a simplified VAT refund if the refund at the taxpayer’s request is to be paid to the VAT account. The act provides that such refund is to be made within 25 days after filing of an application, with no need to meet additional requirements. Thus, use of a VAT account may prove tempting for taxpayers from industries where there is often a surplus of input VAT over output VAT.

Another group that may Take advantage of the split payment mechanism is taxpayers from sectors at risk of VAT fraud, who could potentially be drawn into a VAT carousel. Thus the act provides that buyers using the split payment mechanism cannot be charged punitive VAT rates or punitive interest. Moreover, such buyers will not bear joint and several liability with the supplier of sensitive goods. An additional incentive is a “VAT rebate,” i.e. the possibility of reducing the output VAT based on a formula set forth in the amending act, in a situation where the taxpayer decides to pay VAT to the tax office using a VAT account and the payment is made before the due date for payment of the tax. The earlier the payment, the greater the rebate the taxpayer will be eligible for.

Summary

The split payment mechanism should enter into force on April 1, 2018 but the Senate in its amendments extended the above term to July 1, 2018. Time will tell whether this solution generates the hoped-for results. In our view, this scheme does have huge potential. Undoubtedly it will be attractive for taxpayers operating in sensitive sectors, as well as those filing frequent requests for VAT refunds. We have our doubts, however, whether the incentives provided for in the amendment will truly prove sufficient for this mechanism to be commonly used by VAT payers.